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Are Banks Too Big To Fail or Too Big to Follow The Rules?

How should we feel about homeowners possibly not getting a fair shake with their lenders? I think we can all agree that it is pretty clear that underwater homeowners and those struggling to make their payments want to be treated fairly.  Here is where we are with the mortgage crisis. Attached is an example of how homeowners are being treated.  After seven years, are they really getting a fair shake?  You be the judge.

The lenders must play by the rules, especially those that agreed to the recent $25 billion plus settlement with the fifty state attorney generals.  For those that are not familiar with this settlement it was no small deal.  The six major banks agreed to this after they got caught illegally foreclosing on homeowners nationwide.  After such an event, why are we seeing large underhanded servicing sales of troubled borrowers taking place in what is believed to be an effort to circumvent the rules and possibility accountability?  These are the people in trouble and they may need more focus rather than less.  Selling the servicing rights for these borrowers allows for less regulated non-bank servicers to hammer them as they see fit under the radar of the regulators.  Sounds like Capitalism doesn’t it! 

Using Wells Fargo as the example in this article, playing by the rules may not coincide with their image of the horse draw stage coach carrying the armored express or the prestige of having The Oracle Warren Buffett as a very large long term shareholder.  We don’t want to tarnish that picture but when The State of New York permanently disallowed a $39 billion servicing sale transaction, something is not right.

The article attachment is an accurate depiction of how borrowers are being treated and this, from my vantage point, is nothing new.  The question may be, are the lenders too big to follow the rules to a point where we must have the states step in and stop large sales of servicing between servicers.  This interferes with free market transactions   Servicing has a value that is incorporated into price offerings for new loans to consumers.  If the free markets are not allowed to operative due to punitive actions by the states to protect borrowers then the value of servicing will go down and then guess what?  The cost of a loan will then go up and the homeowners will feel the pinch again.  We don’t need more expensive loans or more regulation.

Loan Complaints by Homeowners Rise Once More

New York Times Published: Wednesday, 19 Feb 2014

I believe we need an incentive system that runs parallel to the regulation much like we have with the utilities and emissions.  If you run a dirty shop, regulation will be very expensive but you do have the right to lessen that burden by buying clean credits from other operators that are much more efficient. This is expensive but it buys you time and creates an incentive to invest in your operation and run clean. As this relates to the lenders, we could overlay this template and publicize who plays fair and you may see the lenders take notice because it could hurt them in the grand race for customers. I am sure we can find a way to give all homeowners a fair shake with free markets and capitalist incentives that will press all the lenders toward better conduct.  We can do better!
 

Blogging from the front line of the housing crisis.

George Omilan

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